Posted by Marc Hodak on December 3, 2008 under Politics | 
The “Big Three” auto companies can’t make a legitimate business case for getting funds from Congress, so they must appeal to their fear.
GM says:
The way I would explain it to your constituents is it’s going to prevent the United States from entering into an economic depression in my view.
Chrysler says:
If we have a catastrophic failure of one of these car companies, in this tender environment for the economy, it’s a huge blow. It could trigger a depression.
I particularly favor Rick Wagoner’s wording (the GM quote above). He’s not actually saying the failure of the auto companies would cause a depression. He’s just saying that’s what congressmen should tell their constituents in justifying a federal bailout.
In the unlikely case Congress asks my opinion, here is what I would have them tell their constituents:
GM and Chrysler have together about $200 billion in assets. In 2002, a particularly “tender environment” for our economy, the top three bankruptcies sent nearly $200 billion in assets into receivership. The federal government didn’t bail anyone out that year. The following five years were ones of significant economic expansion.
I would also note that it is highly unlikely that all three of the “Big Three” will go bankrupt if events run their course. In fact, if GM and Chrysler go into receivership, it’s likely that Ford’s odds of survival go up, not down, notwithstanding all the scare talk about an interdependent supplier network. The fundamental problem with our car companies is: they are making too many cars, and the markets consider the “Big Three” vehicles to be the most expendable. One or two fewer car makers, even if they simply reorganize around a shrunken asset base, will make it easier for the rest to survive.
If Congress feels it absolutely has to “do something” to help the auto companies, it should announce that it will pick just one of the three based on who is worthiest. It will probably pick the wrong one, but by promising to saving one, they can get some real action in terms of the turnaround plans it has requested. And by letting one or two of the others fail, it can then prolong the agony of the decrepit supply chain just long enough to allow the country to see that the Big Three, in fact, do not support the sky.
Posted by Marc Hodak on December 1, 2008 under Politics |
I was trying to imagine what the execs at GM were actually doing to prepare for the presentation in Congress later today. I’m sure the first draft prepared by some savvy junior executives included some consolidations of plants or brands, improved designs, supply chain re-engineering, cost concessions from the unions, etc.
CEO Rick Wagoner would have no doubt responded, “Are you nuts? Who the hell do you think is reviewing this plan? Institutional investors? Venture capitalists? Christ, boys, we’re talking to Congress. Do you think Henry Waxman knows what a supply chain looks like? Maxine Waters thinks P&L is a street corner in Chicago.
“Men, you’re forgetting the customer, again. We’re selling to Congress. They are in the drivers seat. They don’t know squat about ROI or lean production or anything about what makes a car company work. If they had the slightest interest in that, they would have taken a tour of Toyota’s Lexington plant. Men, they want green cars that no one will buy. They want protections for their union patrons. All we have to do is tell them that they can have those things and a turnaround. They’re looking for magic. Show me a plan where we’re delivering that.”
No one in that room would have the balls to point out that Congress also wants the CEO to accept $1 a year, so he’s not going to hear that until some snide reporter asks him on the way to the public airport.
In the end, we will be witness to the spectacle of businessmen acting like politicians (which is much less of a stretch than most would suppose), and politicians pretending to be businessmen (which is pure acting).
Consider that most taxpayers are forbidden by law from investing in private equity firms. Congress considers the average taxpayer as not sophisticated enough, and the typical P.E. partnership as too risky. Imagine, then, being asked to invest in a P.E. firm without a single principal who would qualify as a “financial expert” even by the government’s criteria. Consider, indeed, that the principals consisted almost entirely of economic illiterates. Imagine, further, that these P.E. principals did not earn their positions based on any track record of financial success, but exactly the opposite, based on their track record of squandering as much money as possible, earning negative returns that constantly require capital calls on the limited partners. Consider that this P.E. firm is not only able to solicit you as a limited partner, but compel you to invest. You would be forced to invest in some of the worst performing assets in all the land, and the capital calls that you will be subjected to, will bind your children and grandchildren for generations to come.
Welcome to Congress as your fund manager.
Posted by Marc Hodak on November 30, 2008 under Revealed preference |
It was only a matter of time before a union official found a way to politicize the unfortunate death of WalMart employee, Jdimytai Damour, who was trampled in a Long Island store. According to the SEIU, UFCWU and assorted other XYZUs, there is not an ill in the world that would not be cured if only WalMart were unionized.
In this case, the chain of logic apparently goes like this:
– WalMart uses something close to slave labor to keep prices low (ergo, the customer throngs)
– Part of their low-cost structure includes skimping on various security measures
– A decent union would not have allowed them to skimp on these measures
– Thus, the crowd would have been more orderly, and the man would not have been trampled
This final conclusion is merely insinuated in this story, not spelled out in a manner that might require at least an iota of evidence.
It’s kind of disgusting that anyone would use a tragedy like this for political positioning, but that’s the job of members of the TIOU (Traffickers In Outrage Union). This meta-union includes politicians, organized labor leaders, and the mainstream media. Their unofficial motto: “There outta be a law!” (because, clearly, letting a free people do what they want with their own property isn’t working perfectly).
The UFCWU official in this instance asked:
“Where were the safety barriers? Where was security? How did store management not see dangerous numbers of customers barreling down on the store in such an unsafe manner?
WalMart answered that they had:
added internal security, brought in outside security, erected barricades and worked with Nassau County police in anticipation of heavy crowds.
The video of the stampede supports both WalMart’s contention, and the unusual nature of this event:
Minutes later, police trying to give Damour first aid were jostled by customers still running into the store, authorities said.
Members of the TIOU are especially good in portraying themselves as more concerned about your stakeholders than you are. If it weren’t for the law, you would poison your customers, torture your workers, and pollute your communities. There is not an ounce of shame in proclaiming these things as your stores are thronged by customers and job applicants, and as communities offer all manner of enticements to lure you.
A reasonable verdict of WalMart’s safety strategy would look at their rate of worker injuries given the number of stores they have, including the 2500+ stores that didn’t have any damage to their front doors, versus that of other retailers. Of course, such a perspective would make it extremely difficult to summon the kind of outrage that would warrant inflicting a union on all those stores on the questionable premise that a union would have prevented this kind of incident.
For my part, I’m going to keep taking my chances at WalMart based on the same commercial motives that animate the TOIU.
Posted by Marc Hodak on November 25, 2008 under Revealed preference |
The reason for this is best expressed by my reaction when I saw the headline this weekend about separating the company into a “good bank” and “bad bank.” My first thought was, “how would one would be able to tell the difference?”
But if I were a direct Citi shareholder, I would right now be far more concerned with getting the right people in place, even if they cost a few million more, than about trying to get or keep discount executives, as our political class is insisting upon. The difference between the best and next best in leadership could easily be worth tens of billions of dollars in value enhancement of the bank’s assets. Why would I risk that over a few million in incentive compensation? Of course, silly me, I believe that sometimes you get what you pay for, and that incentives matter.
Also, I won’t invest in a bunch of insomniacs:
In similar news, AIG announced today that they will freeze salaries for their top seven executives and reduce the salary of their CEO, Edward Liddy, to $1. According to Cuomo logic, the shareholders should be ecstatic:
“We believe these actions demonstrate that we are focused on overcoming our financial challenges so AIG can return value to taxpayers and shareholders,” Mr. Liddy said in a statement…
Mr. Cuomo applauded AIG’s decision to limit executive pay, and said other companies receiving federal bailout money should follow suit…
AIG shares fell 4 cents, or 2.5%, to $1.73 in afternoon trading.
During which time the overall market increased by about 2.5%. Hmm.
Posted by Marc Hodak on November 24, 2008 under Executive compensation |
Citigroup has made a deal with the government. The way it’s reported, it sounds like the bank will get over $320 billion in capital and guarantees if they agree to curb senior executive pay to the tune of about $0.03 billion.
OK, so this version of the bailout deal is kind of a warped narrative, but no more warped than the prominence that this aspect of this transaction is getting in the popular press. I believe that all this attention illustrates as clearly as anything how the debate about executive compensation is really two debates. One debate is about dollars; the other is about process.
The more interesting debate by far–the one about dollars–draws most of the unnamed “critics” into the public light, those merchants of outrage cited in the breathless reports in the media. These critics’ attitudes are well summarized as such:
The public wants “strict limits on executive pay,” said Sarah Anderson, a pay expert at the Institute for Policy Studies, which has pressed for executive pay curbs.
IPS is one of those progressive think tanks that provide a ready stable of pay critics (or, in this strange rendering “pay experts”) whenever the subject of compensation comes up. Their critique is simple: the people want limits on pay.
I’m not sure what percentage of the public on whose behalf they speak would describe themselves as progressive (or it’s close cousin, socialist), but a hallmark of any collectivist ideology is that it presumes to speak for “the people.”
In any event, the progressive case presumes that the economy is kind of a zero-sum game, where wealth creation just happens, and wealth distribution is the result of arbitrary decisions by those in power. Such a view naturally leads to the conclusion that higher paid people get theirs at the expense of other, presumably lower paid, people. If you buy these premises, then the solution to “excessive executive compensation” is to define whatever the higher paid group makes as excessive, i.e., in need of “strict limits,” then give “the people” (read: the government) the power to decide how this excess should be distributed.
The idea that certain individuals might have some hand in creating the revenue from which their pay is derived does not enter into the equation. If a salesman’s commission revenue has dropped 50 percent, “the people” may think he deserves nothing, regardless of the commission structure that top executives, the board, or the owners may think is reasonable. Let’s put it up to a vote.
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Posted by Marc Hodak on November 19, 2008 under Self-promotion |
UBS is trying some new incentive plan structures. It is adopting most of the elements that our research has shown works for public companies.
One of those elements is a potentially uncapped reward. Incentive compensation has many moving parts, so it might seem counter-intuitive that a capped bonus potential actually undermines accountability to shareholders, but it’s true–both in theory and in empirical research. The article notes that the uncapped bonus aspect of the proposed plan is a sticking point for “shareholder advocacy group” Ethos. The article ends with:
“UBS does not intend to limit the variable part of the remuneration, by capping for example the bonus in terms of base salary or by setting a maximum amount of shares to be awarded under the long term incentive plan,” Ethos said.
“Consequently Ethos has concerns that the new system will not prevent UBS from paying, in the future, remunerations that could be deemed excessive.”
Ethos’s concerns are unfounded. If they understood how all the elements of the plan work together, and see how it actually works with some of our past clients, then they would see how this aspect of the plan is actually critical to preventing excessive remuneration.
Alas, we can attest that very few “shareholder advocates” or institutional shareholders or any other outsiders who have not been apprised of the plans as the board has, can really, fully comprehend them, especially if the plans involve any innovations. Yet these are the people to whom we want to give a “Say on Pay.”
Posted by Marc Hodak on November 17, 2008 under Movie reviews |
Someone needs to let director Marc Forster know that a Bond film doesn’t have to pace itself like a kaleidoscopic zebra stampede. There is such a thing as gratuitous action. Forster and the writers seem terribly constrained by the need to try to convince their audience that their main character is in mortal danger all the time. They toss up an endless series of close-shave death matches, and manic, nick-of-time escapes. When those become too predictable, they accelerate the pace with quick-cut scenes that become almost a blur. And then they blur them. And then add noise.
All this is basically a wasted, hopeless effort to overcome the thing that cannot be overcome in any Bond film–one’s certain knowledge that Bond can’t die. We know he can’t. No technical or cinematic wizardry can convince us otherwise. Really, they should just give up trying to convince us that Bond might lose a fight if they just throw enough unnamed extras at him, and instead provide some evidence of thoughtful, creative planning, and the exquisitely timed use of whiz-bang gadgetry that might allow us to suspend disbelief. Gives us back the clever Bond with cool toys.
Of course, the perennial problem with Bond flicks is the economic rationale supposedly motivating its villains. In this film, the Brits suspect that a shadowy organization fronting as a Big Green Project, led by the bug-eyed bad guy (played with admirable creepiness by Mathieu Amalric) is trying to horde something–like oil. Oil, you see, is critical to everything; so if someone can control oil, well, they can control everything.
I know what you’re thinking: but isn’t oil a fungible, globally available resource, so that if Russia or Venezuela simply stopped selling us their oil, we’d just end up paying marginally higher prices from less convenient producers, while they would make less money from less convenient customers? Posh. You merely have to assume a fragmented market. If we can’t get oil from one of our neighbors, the lights will simply go off.
At this point, one has to start wondering if this film isn’t a right wing conspiracy. A green, save-the-planet organization fronting for a cynical corporatist? A fragmented market for oil that plays into the hands of madmen? (Wasn’t that the mistaken rationale that got us into a pointless war?)
SPOILER ALERT below the fold
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Posted by Marc Hodak on under Executive compensation |
Remember the preemptive “greed baiting” over the last several weeks, those breathless reports about how much financial services executives were going to get in bonuses this miserable year? So called compensation experts have “gone through the numbers” supposedly showing that bonuses would be every bit as high as last year. These tinfoil speculations sent the likes of Andrew Cuomo and Henry Waxman into fits of outrage. My prediction to any reporter who asked (you’re welcome, Liz) was a bonus drop of 30-50% (among the survivors).
Well, in the case of Goldman Sachs, I was off by, oh, 100 percent. The firm is announcing today that their top seven executives will forgo ALL of their bonuses for 2008.
The top guys at Goldman are all mensch, and they have big kahunas risking the loss of talent to less politically savvy Wall Street sharks. But they know what’s good for the franchise, and are now putting tremendous pressure on their weaker peers (and they’re all weaker) by putting this out there right now.
Whaddya say, Mack? Are you willing to go another year without a bonus? Are you still tapping away to see how much Harry, Dick, and Jane should get (or Colm, Michael, Fabrizio…)? Save yourself the trouble. They aren’t going anywhere in 2009.
Collectively, Goldman’s munificent seven have sacrificed about $200 million on the altar of envy. I’m sure the politicians will take credit for the sacrifice, then take credit for the Spring rain that follows, when all they did was build the altar.
All I have to look forward to next Spring is a much simpler proxy statement.
Posted by Marc Hodak on November 15, 2008 under Collectivist instinct |
Hillary is apparently a top contender for Secretary of State. It’s hard for me to think about what would make this lady, the master of the politics of brute force, so worthy of being the top diplomat. Here is how someone close to her puts it:
“She could weld this world together,” said Susie Tompkins Buell, a Clinton donor and friend. “I think it would be amazing.”
At first I thought that this was just the kind of mindless blather that some of her supporters spout when they’re between thoughts about something they know anything about.
At the same time, it seemed hauntingly evocative of something said by Hannah Arendt:
It substitutes for the boundaries and channels of communication between individual men a band of iron which holds them so tightly together that it is as though their plurality had disappeared into One Man of gigantic dimensions.
Maybe the connection between “weld” and “iron” was too strong in my mind, given my background in materials science.
The “It” Arendt referred to was a condition she would name as “totalitarianism.” Here is perhaps the conclusion that cemented, if you will, her reputation as one of the foremost philosophers of the 20th Century:
By pressing men against each other, total terror destroys the space between them; compared to the condition within its iron band, even the desert of tyranny, insofar as it is still some kind of space, appears like a guarantee of freedom.
Totalitarian government does not just curtail liberties or abolish essential freedoms; nor does it, at least to our limited knowledge, succeed in eradicating the love for freedom from the hearts of man. It destroys the one essential prerequisite of all freedom which is simply the capacity of motion which cannot exist without space.
While it’s dangerous to summarize a thinker as complex as Arendt, she is, in essense, arguing that terror is a the ultimate tool by which the designs of individuals can be completely erased, to be substituted by the designs of a ruler working to implement some kind of ideology.
It’s almost impossible to discuss any politician’s fetish with “binding the people together” in the context of Arendt without risking someone invoking “Godwin’s rule” to end the discussion. But there is no mistaking the context of quotes like this:
We must stop thinking of the individual and start thinking about what is best for society. – 1993
We just can’t trust the American people to make those types of choices…. Government has to make those choices for people – 1993
We’re going to take things away from you on behalf of the common good. – 2004
Not to focus on Hillary, though, we’ve heard collectivist calls to action from our president elect, as well:
Our individual salvation depends on collective salvation. – 2008
And not to pick on Democrats, Obama’s Republican challenger weighed in with:
I can lead this nation and motivate all Americans to serve a cause greater than their self-interest. – 2008
But people seem to fall for it over and over.
Posted by Marc Hodak on November 12, 2008 under Self-promotion |
In a small step toward legitimacy, my Enron Scandal paper passed 1000 downloads today. I don’t check these things every day. (Honest.) I happened to be looking up one of my old papers and saw an even 1000 on the screen beneath my top-ranked paper. I know it’s podunk stuff in the academic world (real academics have a dozen papers with over 1000 downloads, many in the several thousands), but I’m excited by the notion that my creation has attracted 1000 viewers. I hope they liked it. Kurt Eichenwald, author of bestselling Enron tome Conspiracy of Fools liked it. Of course, his book was a major source for my document.
